We have retained our Neutral recommendation on
) following third quarter results.
Why the Reiteration?
Although Allstate's third quarter operating earnings of $1.53 per
share surpassed the Zacks Consensus Estimate and improved over
the year-ago earnings, caution is maintained on the company's
weak investment portfolio, loss on disposition of Lincoln
Benefit, and higher claims and operating expenses. Revenues fared
well on both counts.
Allstate's operating and competitive strength is reflected in its
prudent capital management and modest operating cash flow. The
company's proactive risk mitigation and return optimization
programs continue to enhance operating cash flow and shareholder
value, while generating stable operating return on equity (ROE).
We believe that Allstate is sufficiently liquid and can continue
to deploy capital without putting additional risk on financial
leverage and thus retain shareholder confidence.
Allstate is well positioned to be a long-term gainer in personal
lines, given its scale, pricing sophistication and product
design. Moreover, the impact of acquisitions including Encompass
and growth from emerging businesses have started reflecting in
the Property-Liability segment's net income.
Despite above-average catastrophe costs, the
Property-Liability segment, which accounts for the majority of
Allstate's revenues, continues to be profitable as a result of
careful pricing discipline and strong claim management. This
property and casualty insurer, currently carrying a Zacks Rank #2
(Buy), also scores strongly with credit rating agencies.
On the tepid side, Allstate struggles to maintain its position in
a highly competitive industry, which is marked by escalated
pricing pressure. While spreads between premium growth and loss
cost inflation are expected to remain negative, operating costs
and claims expenses continue to pose a rising trend, leading to
further compression in the underlying margins and earnings.
Further, Allstate's investment portfolio has been witnessing a
rough patch due to the ongoing equity market declines and
Moreover, the volatility in the capital markets has compelled
Allstate to pursue strategies to narrow its product offerings
under its Financial Segment. As a result, the Financial Segment
was a drag, reflecting loss on discontinued operations and lower
As Allstate deals with the property and casualty business, it
is significantly exposed to catastrophic events. Given the
consistent occurrence of weather-related events, catastrophe
losses surged significantly over the last two years. Although so
far in 2013 this loss declined slightly, the recent typhoon
Haiyan and tornadoes that hit parts of Philippines and Florida
are expected to inflate catastrophe losses in the fourth quarter
ALLSTATE CORP (ALL): Free Stock Analysis
CINCINNATI FINL (CINF): Free Stock Analysis
CNA FINL CORP (CNA): Free Stock Analysis
ALLEGHANY CORP (Y): Free Stock Analysis
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Other Stocks to Consider
Other players in the property and casualty insurance space, which
look attractive at current levels, include
Cincinnati Financial Corp.
CNA Financial Corp.
). All these stocks carry a Zacks Rank #1 (Strong Buy).